Logistics 101

Our Guide to the Universal Postal Union (UPU)

This time, we take a look at the Universal Postal Union (UPU). Explore its history and learn why an increasing number of countries are threatening to leave the agency.

The advent of e-commerce has allowed people to order products directly from sellers and manufacturers around the world. According to PricewaterhouseCoopers, German customers can, for example, already order products directly from more than 70 Chinese online shops. Consequently leading to an ever-increasing influx of packages from the Far East, most notably China, in recent years. Out of 100 million parcels coming from outside the EU in 2017, two thirds originated in China, according to the Handelsblatt. Market leader Alibaba, which German online shoppers reach via the AliExpress market portal, stated that it ships 50,000 parcels to Germany a day.

To put this trend into a larger perspective:

  • In Germany (82M inhabitants), the daily number of B2C mailings from the Far East is well into the six-digit range.
  • Every month, around 2M parcels are sent from Chinese online retailers to Belgium (11.3M inhabitants).
  • In Switzerland (8.5M inhabitants), around 45,000 parcels arrive from China on a daily basis.
    (These numbers were recently reported by KEP Meldungen.)

Customers are often convinced by the promise of low prices and free delivery services, even though delivery can take up 30 days and there is the looming threat of additional costs due to customs and import taxes. But how is it possible for a Chinese seller to even offer free delivery worldwide?

 

The Skewed Incentives of International Shipping

Let’s suppose I order a phone charger from China. The seller buys postage from China Post and sends my charger on its way across Asia, before it finally arrives in Germany. The package is handed over to Deutsche Post to deliver it to my doorstep. This is where it gets problematic as Deutsche Post is now stuck with the last mile, the most expensive part of the journey (up to ⅔ of all delivery costs). But as of this moment, Deutsche Post has not received any money for their services. This is where the Universal Postal Union (UPU) comes in. All 192 UPU member countries mutually agreed on the charges that the last-mile delivery service, in this case Deutsche Post, can ask for. From the beginning, the rule has been that developing and emerging countries only have to pay low terminal dues while industrial nations pay a larger reimbursement. As China is still regarded as an emerging country by the UPU, Deutsche Post receives only € 0.97 for each small parcel that weighs a maximum of two kilograms. For heavier consignments of up to five kilograms, € 1.09 are due.

Because of these skewed incentives in the UPU framework, it is in some cases actually cheaper to order products from foreign countries instead of buying at domestic sellers – an economic and ecological dubiousness.

 

The History of the UPU

Over the course of its history, the UPU has set global standards for labeling and customs processes, thus contributing significantly to the rise of global commerce.

Before the UPU was established in 1874, it was necessary to buy and affix the stamps of any country that the letter or package would travel through. At the same time, nations had to negotiate separate postal treaties with each other to decide whether international mail would be allowed to travel to or from them. If no agreement was reached, senders would have to find forwarders in a third country and send their letters on a significant detour.

In order to abolish this complexity, the Universal Postal Union was formed (initially named “General Postal Union”) under the Treaty of Bern in 1874. It established three core principles for cross-border deliveries: (1) A uniform flat rate to mail a letter anywhere in the world. (2) Equal treatment of foreign and domestic mail. (3) Each country should retain the money it collected for international postage.

The treaty was ratified by all 20 founding states, including Germany, the United Kingdom, Egypt, Austria-Hungary and the United States. France and Japan both followed suit and joined in the following years.

The founding ideals eventually showed flaws as UPU member countries realized that they were providing a costly postal service to fellow UPU members basically for free. At the 1906 Rome congress, Italian representatives raised concerns as they had delivered 325,000 magazines and newsletter sent from foreign countries in exchange for basically nothing. Their plead for a framework of compensation went unheard until 1969 when terminal dues, a delivery compensation payment, were introduced.

The UPU defined that terminal dues require “the designated operator that sends a “letter-post item” to another country to remunerate the destination Post for processing and delivering that item”. “Letter-post item” is only vaguely defined to include anything up to two kilograms that is shipped in a envelope. As products like audio cables, phone charges …, which used to be bulk shipped to wholesalers, can be easily shipped in envelopes directly to the buyer, these shipments are subject to the UPU terminal dues agreements. 

 

What’s next for the UPU

The United States, Canada as well as a number of countries from Scandinavia and Latin America recently threatened as well as started to leave the Universal Postal Union. A move to build up pressure to correct the economic distortion caused by the UPU agreements.

According to an article by the German newspaper Welt, China will likely lose its status of a developing country in the coming years – effectively limiting its access to low postal rates.

It can be assumed that this will make online orders from the Far East more expensive. After all, online merchants are likely to pass their increased costs on to their customers. Experts anticipate that delivery costs will increase by up to three euros.